Amazon's cloud chief targets "old guard" tech giants

November 28, 2012|Alistair Barr | Reuters

(Richard Brian Reuters, REUTERS)

LAS VEGAS (Reuters) - Amazon.com Inc's cloud computing division is going after big corporate customers, a new focus that will put the fast-growing unit into direct competition with some of the world's largest technology companies.

Andy Jassy, head of Amazon Web Services or AWS, criticized the hefty profit margins of what he called "old guard" tech companies on Wednesday and unveiled a new data warehousing service that he said will cost about a tenth of existing solutions.

"The old world of technology has a pricing model which is to charge as much as customers can pay. Customers are tired of it," Jassy said, during AWS's first conference in Las Vegas, Nevada, where more than 6,000 people attended.

He is banking on the division to take direct aim at tech stalwarts Oracle Corp, International Business Machines Corp and Hewlett-Packard Co, among others.

Shares of Teradata Corp., a leading independent provider of data warehouse services, fell 3.7 percent to $59.27 on Wednesday on concern about competition from AWS.

"A new competitor is entering the space with significantly lower price points," said Derrick Wood, an analyst at Susquehanna Financial Group. "That's the essence of the concern."

AWS, which Amazon started more than six years ago, provides data storage, computing power and other technology services from remote locations, making it a pioneer in what is now known as cloud computing.

AWS has grown fast because its services are cheap, relatively easy to use and can be shut off or ramped up quickly, depending on companies' needs. Evercore analyst Ken Sena expects AWS revenue to jump 45 percent a year, from about $2 billion this year to $20 billion in 2018.

The division has traditionally been used by start-up tech companies and other smaller businesses. Large corporations, known as enterprises in the tech world, have dabbled with AWS, but most shun cloud-based services for mission critical applications. Jassy said on Wednesday that is changing.

"We expect enterprises to migrate their applications to AWS," he added. "The question isn't if anymore, it's how fast it's going to move and which ones will move first."

Netflix, Royal Dutch Shell, Samsung and InterContinental Hotels Group are a few companies now using AWS, along with more than 300 government agencies and over 1,500 academic organizations, Jassy noted.

"It's increasingly less accurate to say only small companies use AWS," said Bernard Golden, Vice President, Enterprise Solutions for enStratus Networks, a cloud management software company.

AWS is targeting its new data warehouse service, called Redshift, at small businesses and large enterprises.

Companies typically pay between $19,000 and $25,000 per terabyte of storage per year for data warehouse solutions, Jassy said.

Redshift, which launches in early 2013, will cost as little as $1,000 per terabyte per year for companies that reserve the service for long periods, such as a year or more. They can also use it on-demand, which costs more, Jassy said.

Software tools that IT departments in big companies currently use to analyze data in their warehouses will work on the new Redshift service, potentially making it easier to switch, Golden said.

"All that will change will be the pricing," he added. "Teradata will be effected and Oracle, IBM and HP too - although this will impact a very small portion of the revenue for the bigger players."

Jassy said on Wednesday that AWS has the potential to be Amazon's biggest business, out-growing its original online retail operation.

AWS will do this by taking the same low-margin, high-volume approach that has turned Amazon into the world's largest Internet retailer, Jassy said.

Amazon does not disclose financial details of AWS, however, Evercore's Sena estimates profit margins below 10 percent on a net income basis. Sena forecasts margins of 22 percent, based on earnings before interest, tax, depreciation and amortization.

In contrast, Teradata has gross profit margins of about 70 percent on its data warehouse products, according to Susquehanna analyst Wood.

"The economics of what we're doing are extremely disruptive for old guard technology companies," Jassy said. "These are companies that have lived on 60 to 80 percent margins for years."

Jassy showed quotations on big screens behind the conference stage on Wednesday from executives at Oracle, IBM and Hewlett-Packard all talking about their high-margin businesses.

"The vast majority of businesses will be moving to the cloud in the next ten years," Jassy said. "We think it's a high-volume, low-margin business."